Why Sogou Inc. Stock Dropped 9% on Monday

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What happened

"China's second-largest search engine," as Sogou Inc. (NYSE: SOGO) now bills itself, had a rough start to the week on Monday. After reporting Q4 earnings this morning, Sogou stock sold off by more than 10% in early trading, and ended the day down 9.4%. So what went wrong?

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So what

At first glance, very little went wrong at Sogou in Q4. Sales surged 66% to $277.8 million in comparison to last year's Q4, and profits per diluted share quadrupled to $0.04. CEO Xiaochuan Wang pronounced himself "really pleased to post a strong set of results in the fourth quarter." And yet, analysts had hoped for even stronger results.

According to a survey published by Yahoo! Finance, analysts were looking for $280.4 million in sales and $0.07 per share. Thus, regardless of how fast Sogou grew, it didn't do so quite fast enough to please Wall Street.

Now what

With 2017 now in the rearview mirror, Sogou published new guidance for the first fiscal quarter of 2018. Management is looking to increase sales by 35% to 41%, to somewhere between $218 million and $228 million. Management didn't provide earnings guidance for the quarter, but the sales prediction seems bad enough on its own.

Again, "35% to 41%" sounds like pretty brisk growth to me, even if it's slower than Sogou did in Q4. Problem is, Wall Street has already told investors to expect Sogou to grow faster -- in fact, to more than $241 million in revenue. Sogou is therefore compounding the damage from missing one set of estimates by promising to miss a second three months from now.

If you were wondering why the stock is down so much, now you know.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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